UK: Unfair Trade Rules - A Comparison Of The Position In The UK, France And Germany

Last Updated: 26 October 2010
Article by Dr. Gordon Christian, Natasha Assadi-Tardif and Sophia Sperlich

In-house competition and compliance counsel will be well aware how important it is for their companies – in their day-today business dealings with customers, suppliers and competitors – to comply with competition rules at both EU and national level. However, in some member states, the applicable competition rules are supplemented by unfair trade rules that sometimes prohibit certain conduct or require certain dealings where the ordinary competition rules would not do so. A key characteristic of unfair trade rules is that, although (in certain countries such as France) they were introduced in response to abusive practices in the groceries sector, they apply to all business-to-business relations and do not require competition to be adversely affected. Unilateral behaviour is subject to these rules, regardless of the market share of the parties. In some countries, such as France and Germany, infringement of these rules is punishable by courts and the competition authorities have no jurisdiction over these questions. A number of prohibitions are covered by the unfair trade rules, including abrupt termination of a commercial relationship, most favoured nation clauses and upfront access payments. In this article, the authors analyse how the unfair trade rules apply in these three areas in the UK, France and Germany.

Termination of commercial relationships

Commercial agents

The first situation in which termination follows specific rules is if the party whose commercial relationship is being terminated is a "commercial agent" as defined by the Commercial Agents Directive (implemented in the UK, France and Germany). A commercial agent will generally be entitled to compensation on termination of the agency agreement.

UK position

Subject to the two exceptions mentioned below, there are no specific unfair trade rules in the UK that prevent the termination of existing commercial relationships. In English law, parties are free to contract (and correspondingly to stop contracting) as they wish. If an existing commercial relationship is governed by a written contract, any termination will be covered by the relevant provisions. However, if the existing commercial relationship is not governed by a written contract, common law principles will govern any termination, essentially requiring a "reasonable" period of notice.

The second exception to the general rule described above is a provision that only applies in a retail context. Following a 2008 Competition Commission (CC) market investigation into the groceries sector, the CC imposed a number of remedies. It was concerned about supply chain practices arising from the inequality of bargaining power between various grocery retailers and suppliers. Among other things, it was said that certain grocery retailers did not always abide by supply agreements, asked for additional payments without proper justification or unduly delayed due payments.

Therefore, one of the remedies put in place by the CC is a new, tougher code of practice called the groceries supply code of practice (GSCOP). GSCOP is relevant in the present context because it provides for a specific procedure that must be followed when supplier products are delisted and the commercial relationship is therefore terminated. Failure to follow the prescribed procedure enables the supplier to take the grocery retailer to arbitration and, once it is set up in 2012, the groceries code adjudicator for a binding decision.

French position

As a matter of principle, putting an end (even partially) to a commercial relationship is prohibited under French law where there has been no material breach or force majeure situation, unless sufficient prior notice is granted.

Substantially and unilaterally modifying the terms and conditions of a commercial relationship has been considered by French courts in certain cases as amounting to termination.

Therefore, if a contracting party makes things commercially very difficult for the other party – for instance, by unilaterally imposing a significant price increase – it could be argued that this is a form of termination. Similarly, limiting the commercial relationship – for instance, by substantially decreasing sales or purchases – is considered as a partial termination that must be preceded by sufficient notice.

French courts assess the acceptable length of notice periods on a case-by-case basis independently of the fact that a notice period has been provided for in the parties' agreement. The main features that should be taken into account are set out below, the first three features being the most important ones: (1) the length of the relationship; (2) the proportion of the non-terminating party's turnover attributable or related to the relationship; (3) the existence of exclusivity and/or noncompete obligations; (4) the investments made by the nonterminating party in the context of these relationships; (5) the existence (or indeed lack of) alternative suppliers/customers; and (6) the reputation of the products.

According to French case law, an established commercial relationship is not only characterised by the existence of a written agreement. It covers the entire relationship of the parties, also where there have been successive agreements and/or continuous sales and purchases.

As a consequence, any termination of a commercial relationship must be analysed to ensure that it does not constitute an abrupt termination, even where there is an agreement that provides for a specific notice period or where the relationship has not been underscored by a written agreement.

German position

As a general rule, German law protects the contractual freedom of commercial undertakings, including the freedom to terminate commercial contracts. Specific unfair trade rules only apply to dominant undertakings, which are under an obligation to enter into a contract with a customer to avoid breaching German law – section 826 German Civil Code (BGB) – for causing "loss contrary to public policy". If such an obligation to contract exists, a termination of an existing contract by the dominant undertaking can amount to an unfair hindrance contrary to German competition law – section 20 Act against Restraints of Competition (GWB)) – and therefore be void. However, the termination is only void if, on closer examination of the individual case, it can be shown that the obligation to contract would result in a contract substantially similar to the existing one.

Most favoured nation (MFN) clauses

An MFN clause requires a supplier to treat the buyer as well as it treats any other buyer.

MFN clauses that do not prevent, restrict or distort competition do not fall under article 101(1) TFEU and are allowed. An example are retrospective MFN clauses, where the contracting party agrees to grant the most favourable conditions to the customer as previously granted to other customers.

MFN clauses that prevent, restrict or distort competition are exempted under the European Commission's vertical block exemption regulation (VBER) if the market share of each of the contracting party and the customer is below 30%.

If the MFN clauses are not exempted by the VBER, they will have to be assessed individually under article 101(3) TFEU. To assess whether the MFN clause in question prevents, restricts or distorts competition, the guidelines are used. Considerations include, among others, the nature of the agreement, the market position of the parties and their competitors, as well as buyers of the contract products and barriers to entry.

The two main concerns that can arise from the use of MFN clauses are retail price maintenance (RPM) and the exchange of commercially sensitive information. RPM can arise because a supplier has no incentive to lower prices for customers other than the MFN customer because such decreases will have to be matched (and occasionally may incur retrospective compensation). Information exchange can arise because, in order to know whether the MFN clause is in fact being given due effect, the MFN customer needs to know the prices being charged by the supplier to other customers.

UK position

There are no recent OFT decisions regarding MFN clauses. In any event, there are no specific UK unfair trade rules on MFN clauses and the UK position is largely determined by the VBER and accompanying guidelines. The European Commission has concluded in a number of cases (such as gas pipelines, Opodo, Hollywood film distribution and copyright societies) that MFN clauses can give rise to competition concerns such as those referred to above (ie RPM and information exchange). However, in practice, MFN clauses, when investigated at European Commission level, have not given rise to fines but the parties have generally removed MFN clauses from their agreements so that the Commission can then close the case.

French position

Automatically benefiting from more favourable conditions granted to competitors by the contracting party is prohibited under French unfair trade rules as amended in 2008.

It is also prohibited to obtain or seek to obtain an advantage from a business partner that does not correspond to a commercial service provided, or is manifestly disproportionate to the value of the service provided. Such an advantage could also include a request to bring commercial conditions into line with commercial conditions granted to other customers.

These prohibitions were introduced to bring parties to the negotiating table and avoid abuses of bargaining power, created by the automatic nature and lack of consideration implicit in these sorts of clauses.

The newly amended unfair trade rules go even further by prohibiting the imposition of or any attempt to impose conditions on a business partner that create a significant imbalance between the rights and obligations of the parties.

The notion of "significant imbalance" is extremely vague and judges have a great deal of discretion in interpreting it. It is therefore worthwhile for parties to undertake a detailed review of their contracts, to ensure that there are no risks under the French unfair trade rules regime.

German position

In Germany, the GWB, together with the VBER and accompanying guidelines, govern the treatment of MFN clauses.

Prior to 2005, MFN clauses that imposed an obligation on the supplier were held to hinder competition and were void under German law. Since 2005, EU law (including the VBER and the guidelines) has been integrated into the application of the GWB by reference (section 2(2) GWB).

Additionally, if a dominant undertaking uses excessive pressure to obtain a favourable MFN clause, the conduct could fall under the German Act against Unfair Competition (UWG) section 4, para 1 and 10, in which case the conduct needs to be stopped and an action for damages can arise (see below).

Upfront access payments / listing fees

Upfront access payments (UAPs) are common in the retail sector, where grocery retailers will often require such payments from suppliers. UAPs are defined in the European Commission's recent VBER guidelines as fixed fees that suppliers pay to distributors in the framework of a vertical relationship at the beginning of a relevant period, in order to get access to their distribution network and remunerate services provided to the suppliers by the distributors.

According to the VBER, UAPs are allowed in principle (if the market share of both the manufacturer and the retailer are each below 30%) and are only exceptionally found to result in anticompetitive foreclosure. UAPs can lead to a more efficient allocation of shelf space, reduce the asymmetry in information between suppliers and distributors and so benefit customers.

In the VBER guidelines, UAPs may have anticompetitive effects on the market and will not be exempted, where they (1) lead to anticompetitive foreclosure (ie the widespread use of upfront access payments increases the barriers to entry for small entrants); (2) lead to an increase in the retail price and reduce the incentive to compete on price on the downstream market (ie where the distribution market is highly concentrated); and (3) increase the barriers to entry for smaller suppliers on the market.

UK position

In the UK, the grocery retail sector has been under significant regulatory scrutiny by the competition authorities for some time. The latest in-depth investigation was the CC market investigation into the groceries sector (referred to above). During that investigation, the CC received a number of complaints about UK grocery retailers imposing UAPs.

However, the CC was unable to find any evidence to suggest that lump-sum payments to grocery retailers act as a significant barrier to entry or expansion for small suppliers. In addition, the CC did not find any evidence that obtaining lump-sum payments from suppliers distorts competition between grocery retailers or between suppliers. Rather, the CC considered that by compensating a retailer for the risks and costs of listing new products, UAPs such as slotting allowances may facilitate the introduction of products that retailers may otherwise be deterred from stocking.

This relatively relaxed view of UAPs is mirrored in the (more recent) VBER guidelines' treatment of UAPs, where the European Commission only identifies competition concerns in a small number of scenarios (such as where the UAPs are so high that they constitute a barrier to entry for smaller suppliers).

Nevertheless, as a result of the GSCOP remedy, since February 2010 major grocery retailers in the UK are subject to a new code. This states that a retailer must not directly or indirectly require a supplier to make any payment as a condition of stocking or listing that supplier's grocery products, unless such payment is made (1) in relation to a promotion; or (2) in respect of grocery products which have not been stocked, displayed or listed by that retailer during the preceding 365 days in 25% or more of its stores, and reflects a reasonable estimate by that retailer of the risk run by that retailer in stocking, displaying or listing such new grocery products.

French position

UAPs are not prohibited per se and are also common practice in the retail sector in France. However, they should not be required without being part of an actual commercial relationship and being accompanied by orders.

French unfair trade rules prohibit obtaining or seeking to obtain an advantage, as a precondition to placing orders, without a written agreement on a proportionate volume of purchase. In other words, asking for a fee to be paid without any consideration is prohibited.

German position

The UWG, in combination with the GWB, can prohibit UAPs or other conduct which has the potential to hinder noticeably competitors, consumers or other participants in the market (section 3 UWG; examples listed in section 4 UWG).

Where a retailer demands UAPs from its supplier, threatening to treat the supplier detrimentally if such UAPs are not paid (ie threatening to terminate or not to enter into a commercial relationship), such conduct is generally allowed, unless the retailer is a dominant undertaking or threatens the use of other, unfair conduct (eg to break existing contracts, to denigrate him to third parties or to leak internal issues to the public). However, the provisions of the UWG are used restrictively so as not to undermine the GWB provisions protecting competition.

Penalties

There are specific penalty regimes in France and Germany that are somewhat different from the UK.

French position

French unfair trade rules provide that any interested third party can bring an action for damages to compensate for losses suffered. Although unfair trade rules do not fall within the French competition authority's jurisdiction, the authority's president can refer a case to courts if there is a possible unfair trade infringement. In addition, the minister of economy and the public prosecutor can request that courts (1) order that the practices be stopped and/or (2) declare an infringing clause void and/or (3) order the reimbursement of the sums unduly paid and/or (4) impose a civil fine amounting to a maximum of €2m which can be increased to three times the sums unduly paid.

Up to now, the minister of economy has mainly brought actions to protect suppliers against large retail chains (recently imposing a civil fine of €300,000), but these rules can be applied in all sectors.

The number of lawsuits based on unfair trade rules increases every year (approximately 16 judgments in 2005, 21 in 2006, 29 in 2007 and 35 in 2008). The total amount of fines in 2008 was €1.54m, although individual fines can be as little as €20,000.

It should be noted that, to avoid lack of enforcement of these provisions, the minister of economy and/or the public prosecutor can bring cases even if the "victim" does not wish for this to happen.

German position

In Germany, an action for damages can be brought by competitors under section 9 UWG. However, this only applies to direct competitors and does not enable damages to be claimed by parties which are in a vertical relationship with the defendants. Damages can only be claimed where the infringement of the UWG has been committed intentionally or negligently. Damages caused by the infringement are assessed under the German civil code and are calculated as the loss of profits. The damages can be estimated by the court under the German civil procedure rules. If the damages are estimated by the court, the claimant has to provide at least the basis on which the damages are calculated, which can prove difficult. Additionally, restitution can be claimed in certain cases.

Conclusion

It is clear from the above-mentioned analysis that France stands out as the jurisdiction where unfair trade rules cover a particularly broad array of conduct and where the uncertainty about how certain key concepts will be applied is greatest. Nevertheless, the authors believe that all in-house competition and regulatory counsel would do well to remember that competition law is not the only area where businesses are exposed to significant risks – unfair trade rules can also lead to similarly undesirable consequences when they are breached.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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